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Fighting Fraud in Opportunity Zones

14th Mar 2023

The need for transparency in Opportunity Zones

The Opportunity Zones Initiative has been a historic success, giving those committed to helping underserved communities the ability to drive investment toward the areas that need it most. But until the government makes the changes necessary to support those OZ projects that are doing good and weed out those that are taking advantage of a worthwhile program, it falls on industry leaders to commit to best practices in order to improve OZ’s reputation.

The ramifications of fraud in Opportunity Zones

In 2022, a New York real estate fund manager was sentenced to 48 months in prison after pleading guilty to using fraudulent misrepresentations to raise money from investors who wanted to invest in an Opportunity Fund. Rather than actually going toward projects in underserved communities, investor funds were used to pay distributions in “a manner akin to a Ponzi scheme.” Additional actions included fabricating documents and falsely inflating the company’s assets under management.

While the above case is a rare outlier, it shows how well-meaning investors can be duped by bad actors and the need for vigilance on the part of government regulators. Unfortunately, there is a widespread perception regarding OZ that it was designed to be taken advantage of by well-connected individuals and not to help communities in need.

A federal probe was initiated because of accusations that the demarcation of zones was done to benefit those in positions of influence and that the Treasury Department’s rules were overridden for the benefit of certain developers. Even the lawmakers who proposed the OZ initiative were left asking for clarity on how the zones were chosen and evidence of the impact that has been created. Organizations such as the NAACP have decried the “lack of transparency” and need for “public reporting requirements, standards and public disclosure.”

While the optics of these news items can be bad, cases of outright fraud have been rare. But without the data to prove OZ is working, the industry will a tough time convincing the public that these issues can be easily remedied.

Fighting against misleading perceptions

Any government program can be a target of fraud by those who want to take advantage of well-meaning investors, which is why other government programs, such as EB-5, have regulations in place to identify and separate the good from the bad. OZ has no requirements for reporting on impact, meaning funds don’t have to prove their projects did any good in their communities, leaving the public to assume the worst and harming the program’s reputation as this lack of transparency reinforces the idea that OZ investments don’t help underserved areas. But even in terms of the regulations that are in place for OZ funds, actually identifying and decertifying those in violation has proven difficult.

In a report from February 2022, the Treasury Inspector General for Tax Administration found “IRS processes and procedures did not fully identify and address annual QOF compliance reporting requirements,” but that the IRS stated it “could not commit to developing processes and procedures to decertify until guidance to address QOFs that intentionally do not comply with program requirements have been issued.”

If we still don’t have the proper procedures to find and remove Opportunity Funds that don’t comply with the program’s rules, what can be done to keep OZ free from bad actors who might sink the program’s chances of extension or renewal in the future?

Improving Opportunity Zones through legislation

OZ has plenty of advocates who care about impact, and they largely agree on two major changes that would help the program thrive. The first is to redraw the OZ map, with clear designation of when an area should no longer qualify for OZ incentives and how to identify other areas in need of investment. This would make the program evergreen as it could continually drive investment to where it is needed most.

The second major change would be the institution of impact reporting. Currently, the public simply doesn’t have access to adequate data to assess which projects are doing good and which aren’t. By implementing a requirement for impact reporting, it would be easy to see who is following through on the promise of OZ and who is looking to take advantage.

In 2022, legislation was introduced that would have, among other things, taken steps toward solving both of these major issues. Many in the OZ industry were in favor of these changes, but unfortunately the legislative session ended without passage of the bill. It’s unclear if the chances for a legislative solution will improve in 2023, but until the government takes action, it’s on those in the industry to prove to the public that OZ is working through a commitment to best practices.

How JTC helps Qualified Opportunity Funds provide greater transparency

Because of the negative press surrounding OZ, it’s natural that investors may be worried about fraud, especially if they’re investing out of state where it would be harder for them to keep a close eye on projects. Impact-focused investors want more information both for their own peace of mind (they want to be sure their investments will qualify for OZ tax incentives) and to ensure their investments will go toward making a positive impact.

Funds that work with JTC as their third-party fund administrator are able to provide that information. As a leader in Opportunity Zones fund administration since the program’s inception, JTC has pioneered methods for tracking and reporting on social impact and helping investors evaluate the success of projects with different impact goals. JTC’s online investor portal allows for 24/7 investor access to fund and project information from any device, anywhere in the world.

While we wait for the government to institute requirements that will help OZ thrive and last into the future, those in the industry can provide investors with the transparency they desire and improve the initiative’s reputation by committing to best practices like those followed in the solutions offered by JTC.

Downloading JTC’s Opportunity Zones Fund Administration Fact Sheet!

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